2nd Qtr Portfolio & Market Observations 2017

In its own boisterous but rewarding way the first half of 2017 has flown by; the Federal Reserve became less accommodative, American policymakers remained deeply divided, and the threats to the European Union’s survival were rising and fading. Despite these issues the equity markets kept making new highs. Those who exited the market in the beginning of 2017, citing historically high levels, an inexperienced and controversial new U.S. President, and continuing political and religious turmoil around the world, may regret not being strong believers. We are in the third longest economic expansion since 1850 and the second longest bull market in modern history.

In March 2009, the current bull market began with a strong bounce from the panic lows. As the economy started to recover earnings drove stock prices higher. The strength of this bull market came into question between May 2015 and November 2016 when the main market indexes stalled and the Dow Jones Industrial Average actually lost some ground over low oil prices and election anxieties. Since then however, the Dow has risen over 19%, posting seven all-time highs in the month of June alone, the S&P 500 Index added 16%, and the tech-heavy NASDAQ advanced by 22%.

Recent data has persistently shown an expanding economy. Business investment, a weak spot through the last eight years, bounced back to levels not seen since before the financial crisis. Corporate earnings for the first quarter of 2017 rose by 10% to 15%. Consumer spending, comprised of both the ability to spend (income) and the willingness to spend (sentiment), has risen significantly following the low unemployment numbers. Inflation, on the other hand remains stubbornly lower than the Fed’s 2.0% target rate, and wage growth is significantly below levels consistent with full employment. It puts the Fed, with its dual mandate to fight both unemployment and inflation, in a somewhat perilous position. The low unemployment suggests more aggressive rate hikes but low inflation says “not yet”. For now, the Fed sees the risk of keeping the rates low greater than those of raising them, so we expect incremental rate hikes for the remainder of the year. The markets largely expect continued tightening, so we presume the impact of any rate increase will be minimal as the interest rate policy becomes driven by stability rather than change.

As we enter the second half of this eventful year, we anticipate that additional clarity offered on corporate tax reform in the coming months will provide further insight into profit growth in the coming year, which will justify relatively high stock market valuations. As investors increasingly trust that the economy can withstand the diminishing monetary support, sound fundamentals should continue to support the market and drive it higher. Conversely, challenges surrounding the implementation of President Trump’s agenda from both sides of the aisle, additional rate hikes, the U.S. debt ceiling debate, and the situation with North Korea among other areas of global unrest, will most likely lead to sporadic stretches of stock market volatility.

Aside from the obvious uncertainties we believe that investors should feel good about the market at the mid-point of 2017. The economic expansion is poised to continue. This eight-year old bull market will most likely continue as stocks are in a good position to potentially deliver modest additional gains in the second half of the year.

Dumont & Blake Investment Advisors, LLC
June 30, 2017


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